Fire or Damage Before Closing in Ontario: Equitable Conversion and Who Bears the Risk

What happens if the house burns between firm offer and closing

A signed Ontario Agreement of Purchase and Sale can still be weeks away from keys. In that window, fire, flood, storm, or another casualty can gut the dwelling. The question is not abstract: who bears the risk of loss, and what can each side do under the contract.

At common law, the doctrine often called equitable conversion can put the risk of accidental loss on the buyer once the contract is binding. Ontario residential deals almost never leave that harsh result alone. The standard OREA-form insurance clause reallocates risk and gives the buyer a defined election when damage is substantial.

A Toronto real estate lawyer reads that clause against the rest of the APS, the insurance particulars the seller can produce, and the closing calendar. This post maps the usual Ontario path — not a national summary and not advice for your file.

Equitable conversion: the common-law starting point

Equitable conversion is a property-law idea: once a valid contract binds the parties, equity may treat the buyer as owner of the land and the seller as entitled to the purchase money. Older cases used that idea to put accidental destruction of buildings on the buyer before legal title passed.

That default is harsh. A buyer who has not yet taken possession can, in theory, still owe the full price for a shell. Canadian commentary and courts have long noted that standard-form insurance clauses exist to soften that result. Do not assume equitable conversion is the last word on a modern OREA APS.

The OREA insurance clause: seller’s risk, buyer’s election

On the usual Ontario residential form, buildings and other things being purchased remain at the seller’s risk until completion. Pending completion, the seller holds any insurance policies — and the proceeds — in trust for the parties as their interests may appear.

If there is substantial damage, the buyer may either terminate the agreement and have monies paid returned without interest or deduction, or take the proceeds of any insurance and complete the purchase. Insurance is not transferred on completion. Mortgage assumptions or vendor take-backs can add separate proof-of-insurance duties for the buyer on closing.

Those are contractual rights. They are not a guarantee that a policy exists, that coverage will respond, or that the payout will rebuild the home. The Supreme Court of Canada’s decision in Wile v. Cook ([1986] 2 S.C.R. 137) is the leading reading of a closely worded insurance clause: the seller is under no duty to take out insurance in any particular amount, and the buyer who elects to close takes whatever proceeds are available — not a guaranteed cheque.

Whether damage is “substantial” is fact-specific. A scorched countertop is not the same file as a total loss. Do not invent a percentage threshold from a blog.

What the buyer can — and cannot — demand

The election is usually binary under the standard wording: terminate and recover the deposit (and other monies paid), or close and take insurance proceeds. Courts have said the buyer is entitled to insurance particulars and a reasonable opportunity to assess the options. The clause does not give an open-ended right to wait and see whether the insurer will pay.

Ontario’s Superior Court applied that framework in McDonald v. Lowrie (2025 ONSC 1397). After a fire destroyed the dwelling before closing, the buyer insisted on a seller guarantee of a minimum insurance payout as a condition of closing. The court treated that demand as a variation the seller did not have to accept, found the buyer was not ready, willing, and able to close on the APS as written, and left the deposit with the seller. Facts matter; that case is an illustration, not a prediction for every casualty file.

Practical takeaway: if the payout or coverage looks unsafe, the contractual off-ramp is often termination under the insurance clause — not rewriting the bargain on closing day. File-specific strategy belongs with counsel, not with a template email.

What sellers and listing counsel usually do

Notify the insurer promptly. Preserve the scene as the insurer directs. Keep the policies and any proceeds in trust as the APS requires. Give the buyer’s lawyer enough policy and claim detail to make a real election. Extensions of closing are negotiated; they are not an automatic right to sit out the adjuster’s timeline.

The seller is generally not obliged under the standard clause to rebuild before closing, to abate the price, or to guarantee that the insurer will pay a named sum. Those outcomes need a fresh agreement or a different Schedule A. For the ordinary step-by-step of an Ontario closing once the deal is firm, see the real estate closing process guide.

Insurance, title insurance, and disclosure — three different tools

Home (property) insurance is forward-looking: fire, water, theft, and similar perils. Title insurance in Ontario is not a substitute. Title policies look at ownership, fraud, and certain pre-existing title risks. Physical fire damage is home-insurance territory, not title-insurance territory.

Seller disclosure duties about latent defects are also a different lane. A fire that happens after a firm APS is a casualty under the insurance clause, not a classic latent-defect disclosure fight. Pre-existing hidden defects that made the home unfit are covered in seller disclosure in Ontario. Do not collapse those topics.

Firm deal timing: why conditions still matter

The insurance-clause headache lands hardest after the deal is firm. While financing, inspection, or status conditions are still open, the buyer may have other exit routes written into Schedule A. Once every condition is fulfilled or waived, walking away is breach unless another clause (including insurance) applies. The condition map is in Ontario real estate conditions.

Deposits sit in trust and are credited on closing. If the buyer validly terminates under the insurance clause, monies paid are generally returned under that wording. If the buyer repudiates a firm deal instead, forfeiture risk looks more like the ordinary deposit rules in real estate deposits in Ontario. The APS form language controls; read yours.

What lawyers actually do on a casualty file

Buyer’s counsel: get the clause in front of the client immediately, demand policy and claim particulars in writing, calendar the closing and any extension, and document the election. Do not invent a guaranteed payout the APS does not give.

Seller’s counsel: confirm coverage notice, assemble the trust paperwork for policies and proceeds, avoid over-promising what the insurer will do, and keep time-of-the-essence alive unless both sides extend in writing.

Lenders care too. A mortgage commitment written against an intact dwelling may not fund a burned lot on the same terms. Coordinate early. Residential purchase legal fees start at $2,299 + HST and sales at $1,999 + HST; a casualty file can still add urgency, extended closing work, and insurer paperwork beyond a quiet resale. Fee structure is in real estate legal fees.

For how the standard form is built before anything goes wrong, the overview of the Agreement of Purchase and Sale is the companion piece. Casualty risk is one clause among many — but when fire hits, it is the clause that decides the file.

Bottom line

Equitable conversion explains why standard forms bother with an insurance clause. On a typical Ontario residential APS, the seller carries the risk until completion, and substantial damage gives the buyer a terminate-or-take-proceeds election — without a guaranteed rebuild cheque. Call counsel the day you learn of the loss. The closing clock rarely pauses on its own.

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